Your creditworthiness is a measure of how well you’ve handled your credit and debt obligations. Creditors can tell how you've managed borrowing money by looking at your credit report, which is a record of the activity on your credit accounts. Your credit score is based on the information in your credit report.
Creditworthiness plays a major role in having your loan applications approved. The name is pretty self-explanatory—your credit score describes how worthy you are of credit.
What Is Creditworthiness?
Cambridge Dictionary defines creditworthiness this way: "Someone who is creditworthy has enough money or property for banks and other organizations to be willing to lend them money." But you must also demonstrate that you know how to responsibly handle your money, your property, and any debts you take on.
What contributes to being considered creditworthy can differ depending on the type of account for which you’re applying. The bigger the debt you’re looking to acquire, the more creditworthy you have to be. Mortgage lenders typically have higher standards of creditworthiness than credit card issuers.
- Alternate name: Credit score
You can be approved for some credit cards with a low credit score, but you might have a hard time being approved for an auto loan with a low credit score.
How Creditworthiness Works
Credit reports can be numerous pages long and very time-consuming to review. Creditors and lenders will use credit scores to measure creditworthiness rather than review complete credit reports. These scores are an objective measure of your creditworthiness based on your credit report information.
The Fair Isaac Corporation (FICO) is the most well-known credit scoring system, and it's used by the major credit reporting bureaus.
Your credit score is a three-digit number, typically ranging between 300 and 850. The higher your score, the more creditworthy you are. You’re more likely to repay your debt obligations on time, so more creditors and lenders will be willing to approve your applications and reward you with a lower interest rate. They're not taking on a lot of risk by lending to you.
How often you pay your bills on time is the biggest factor that affects your creditworthiness. Recent late payments and other delinquencies can make you less creditworthy and, as a result, make it harder to get approved for new credit cards and loans.
Your creditworthiness is also affected by the amount of debt you're carrying. Having high credit card balances, for example, can make it more difficult to have your loan applications approved. You're already on the hook for paying a lot of money back.
The best habit to your creditworthiness healthy is to keep your credit card balances below 30% of your credit limits. Pay down your loan balances and minimize your new applications for credit, only applying for new accounts as is absolutely necessary.
It's Not Just About Applying for Loans
Staying on top of your creditworthiness is important even when you don't have a credit card or loan application planned for the near future. Many other businesses, such as cell phone carriers and cable service providers, consider your creditworthiness, too. Keeping your credit in the best shape means you never have to worry when a business wants to check your credit.
Keeping track of your credit score is the best way to stay on top of your creditworthiness. You can check for free by signing up for Credit Karma, Credit Sesame, or Wallet Hub. These services give you access to your credit score as well as tips on improving your credit score and your creditworthiness.
How to Improve Your Creditworthiness
You have to prove to creditors and lenders that you’re not at risk of defaulting on new credit obligations if you’re having trouble getting approved for new accounts.
Start by taking care of past due accounts and debt collections. Creditors will remove the account from your credit report in exchange for payment if you can negotiate a pay for delete, but paying the account will benefit your creditworthiness even without this deletion.
Start building a positive payment history by making timely payments on your accounts going forward. Consider opening a secured credit card to add a new account to your credit report if you don’t have active, open accounts. You’ll improve your creditworthiness and your ability to be approved for other credit cards and loans as you make timely payments on this type of card.
A secured credit card is one where you make a deposit with the lender and, in exchange, you'll receive a credit line usually equal to the amount of the deposit. These lenders report to the credit bureaus.
Make bigger down payments on loans if possible. You might be able to get approved for a mortgage or car loan even without the best creditworthiness if you make a larger down payment because this means you're borrowing less. It reduces the amount of risk the lender is taking on.
Having a co-signer can also improve your odds of getting approved if that person is creditworthy. When someone co-signs with you, they're agreeing to be responsible for payments on your credit card or loan when and if you’re unable to make these payments on your own. But be careful with this option because falling behind on your payments will affect both your credit and theirs.
- Creditworthiness is a measure of how well an individual manages their debts.
- Creditworthiness is commonly measured by an individual’s credit score. The higher the score, the more creditworthy that person is considered to be.
- Your creditworthiness can determine what kind of interest rate you’re offered on loans, or whether you’re approved for a loan at all.
- A number of options exist for improving your creditworthiness.